Wednesday, August 22, 2012

Echo Boomers

Liz Ann Sonders writes:

In history, few forces have been as strong behind stock returns as demographic trends: movements in population, age, gender and employment status, among others. Much focus has been on Baby Boomers, especially as they begin to retire, and their effect on markets in the future. Yes, they're now more risk-averse than ever, and this is not likely to change. But what about a key generation behind them?

Those born after 1980 are generally considered "Millennials," but I prefer the description "Echo Boomers," as they represent many of the children of Baby Boomers. Millennials are often characterized as having less financial savvy and weaker job prospects than their Boomer parents. The result is an impression of a generation equally as disenfranchised from the stock market as the Baby Boomers.

However, I think many may be underestimating the positive impact this generation may have on investing trends. I recently read an interesting report on the subject by Turner Investments in which it noted that the Millennials are "digital natives"—the first generation raised with technologies such as personal computers, the Internet and smartphones that prior generations had to adapt to later in life.

My two children (ages 12 and 16) can't fathom that I had to rely on libraries, books, encyclopedias and a typewriter when I was a college student. But they're part of a generation that's become completely reliant on "new" technologies. Eight of 10 of Millennials sleep with their cell phones in reach (count my kids in the 20% that don’t, though they would if we let them).

The Millennials are highly educated: About 40% of college-age Millennials are enrolled in higher education—the greatest percentage in US history. Yes, some of that's a result of the rough economic ride they've been on over the past decade or so. They've had to suffer two economic/market crises since 2000, starting with the bursting of the technology bubble and followed by the bursting of the housing bubble and the attendant financial crisis. The dearth of jobs has hit the generation particularly hard. About a third of 18-29 year olds are unemployed, under-employed or simply out of the work force.

Don't underestimate the Millennials

Turner offers seven reasons why the financial prospects of Millennials may be much better than is popularly supposed and why Millennials may "bring about a Great Bull Market of the 21st Century":

1. The Millennial generation is huge at more than 85 million—even larger than the Baby Boomers' 81 million. It wasn't until Boomers were in their 30s that they began to truly make their presence felt in the stock market. The great bull market of the last century was the result. My additional perspective: vehicles like 401(k)s make it easier and more "automatic" for this cohort to invest.

2. Millennials' financial struggles thus far are actually fairly typical of early adult life: paying for education, finding a first job, relocating, buying a first house and learning the vocational ropes.

3. Macroeconomic headwinds facing Millennials—notably high unemployment and depressed housing—are likely to be temporary. My additional perspective: housing has likely already found its bottom and household formation has jumped significantly since its lows.

4. Baby Boomers once faced similar macroeconomic headwinds (during the late 1970s and early 1980s), but were still able to subsequently invest in stocks and drive the market to new highs during their peak earning years.

5. Despite all of their financial troubles, Millennials are savers and are already investing in stocks. Twenty-something investors have more stocks in their 401(k) accounts today than their counterparts did a decade ago, according to the Investment Company Institute. About 80% of 20-somethings had devoted at least 60% of their 401(k)s to stocks in 2010 (the latest year of data) versus 70% in 2000.

6. Millennials tend to be optimists and are more willing to take risks relative to their parents' generation. About 29% of all entrepreneurs are Millennials, according to the Kaufman Foundation, suggesting an appetite for risk.

7. Millennials are putting emerging nations in a demographic sweet spot. The ratio of workers to the total populace in East Asia rose from 47% in 1975 to 64% in 2010. In Latin America the ratio rose from 44% to 56%, and in South Asia it rose from 45% to 55%. A sizable new class of investors is surfacing around the globe.